Germany's Schwedt refinery losing out in race from Russian oil

By Marek Strzelecki and Markus Wacket

WARSAW/BERLIN (Reuters) - Slashed output at Germany’s Schwedt oil refinery demonstrates the difficulty Berlin faces in turning away from Russian oil, despite plans to work with Poland to find alternative supply.

Schwedt has traditionally supplied 90% of the gasoline, diesel, jet fuel and fuel oil used in Germany's capital city.

However, three months after Warsaw and Berlin agreed to work together the refinery is running at 50-60% of capacity and those alternative supplies remain elusive.

Moscow last month retaliated against their bilateral efforts by halting oil flows to Poland via the Druzhba pipeline, thereby squeezing Poland’s ability to free up oil for Schwedt.

Polish state-controlled refiner PKN Orlen now needs to use more capacity at the Gdansk oil terminal to feed its own Plock refinery.

As result, Schwedt can count on one tanker slot in Gdansk per month at most, about 1 million metric tonnes of oil per year, or just a third of the volume earlier plans called for, a Polish source said.

Germany stopped buying Russian oil in January and the 233,000 barrel-per-day Schwedt refinery since has been running at about 55% capacity, or some 130,000 barrels per day, relying on pipeline supplies from the port of Rostock in northern Germany.

Supplies via Poland have so far yielded just two tankers, sources in Poland and Germany said.

ROSNEFT STAKE

Germany and Poland started discussions about shipping non-Russian oil to Schwedt via the port of Gdansk, Polish pipelines and Druzhba in early spring 2022.

Druzhba can deliver both Russian and Kazakh crude.

But a major hurdle has been Schwedt’s ownership structure as Russian refiner Rosneft owns a 54.17% stake.

Berlin put the refinery into a trusteeship in September but it was not until mid-February that it drafted legal changes allowing the sale of Rosneft's stake without the need for prior nationalisation.

Removing the Russian firm from Schwedt was a crucial part of the agreement for Warsaw.

A German court is set to review Rosneft's complaint against the trusteeship on Tuesday. A verdict favouring Rosneft, would make nationalisation, by far a stronger measure, less likely, sources in Germany and Poland said.

Poland’s PKN Orlen, which owns a network of gas stations in Germany, expressed interest in taking a stake in Schwedt last year.

It could team up with a German partner, but won't move fast given the uncertain circumstances, one source said.

"At this stage all of the options are open," Robert Sleszynski, executive director for mergers and acquisitions at Orlen, said on a conference call on Feb. 24.

KEBCO

In a move that further complicated talks with Poland, Germany late last year approached Kazakhstan about supplies for Schwedt, sparking new concerns in Warsaw.

There is no way to verify if ordered volumes are Kazakh oil, known as KEBCO, or Russian crude sold without a discount to benchmark Brent crude as required under a G7 price cap, thereby exposing the Polish pipeline operator to potential legal risks.

Last month, Germany laid out a plan that would see Schwedt achieve 75% output capacity within two and half years by boosting the capacity of the pipeline from Rostock to 9 million from 6 million tonnes of oil per year, Brandenburg's economy ministry said.

"Knowing the capacity of the Gdansk port, the needs of Schwedt and the Polish refineries, there's not much more room in the system left, so making the Rostock line more available is crucial," Orlen’s Sleszynski said on Feb. 28.

(Reporting by Marek Strzelecki and Markus Wacket; editing by Jason Neely)